It’s Tax Day. Most of Us Paid Too Much. So, How Will We Reduce the Deficit?
April 15th, Tax Day, is upon us (it’s April 18th this year.). That means our Federal Income Tax liability must be determined. Our hope is that over the last calendar year we withheld enough, maybe too much, leading to a refund.
We usually need a tax software package or a tax accountant to determine the correct amount of tax due. Then there are state income taxes to pay and local taxes. How much tax does an income earner pay?
The very complicated federal and state tax forms are used to determine what we owe to the federal and state government. We also pay taxes to the local government. If we added it all up, Americans who work and contribute to the economy may be shocked. If we live in a state with a sales tax, it’s even worse.
On the federal level, income earners must pay federal income taxes. If most of the income is earned through wages, as is the case with the vast majority of Americans, there are additional payroll taxes. Wage earners must also pay Social Security tax, Medicare tax, and unemployment insurance tax. Payroll taxes are twice what we actually pay since our employers pay the same amount we pay for each employee.
According to the Tax Policy Center, about 80% of taxpayers pay more in payroll taxes than income taxes. The figure is higher than 80% when added to the payroll taxes the employer pays on our behalf.
Including the employer contribution, the total Social Security tax is now 12.4% of wages, for nearly every American. The Medicare tax is 2.9% of wages for every American. Depending on your income, you pay anywhere from 10% to 37% of all income in Federal Income Tax.
Then if you live in one of the 42 states that have a state income tax, you could pay as much as 13% of your income there. And if you live in one of the 45 states with a sales tax you could pay another 7% on almost all of your consumption.
Then there are property taxes you pay on the home you own. And excise taxes are placed by both the federal and state government on products like gasoline, alcohol, airline tickets and cigarettes.
The federal government and many states then collect estate taxes when you pass away. It is very difficult to determine exactly how much an individual pays in taxes to all levels of government. Adding it all up, most income earners conclude they are way overtaxed.
Americans should consider the high tax environment when discussions take place shortly about the debt ceiling and future deficits. The public debt now exceeds $31.5 trillion dollars. On an economy with $25 trillion in annual gross domestic product (GDP), the debt figure is too way too high.
And it’s getting worse. In the last four fiscal years from 2020 to 2023, the federal government budget deficits added $9 trillion to the public debt.
The coming debt ceiling debate will be focused on how to reduce the deficit and the debt. There are only two choices: raise taxes or reduce spending. Since Americans are already over-taxed, most don’t favor a tax increase.
Reducing spending will be very difficult. About 60% of government spending is for entitlement programs including Social Security, Medicare and Medicaid. Nearly 10% of spending is for interest on the public debt. The last 30% is divided almost equally between defense spending and spending on social programs.
Under the current administration, cutting social programs will be difficult. With the world in turmoil, reducing defense spending will be difficult. Since the interest on the public debt must be paid, that leaves the entitlement programs, which politically can’t be reduced. So how do we solve the problem?
Both Social Security and Medicare will be bankrupt within 10 years unless something is done. We need a solution that reduces government entitlement spending and keeps the programs solvent, without hurting current retirees.
Since there are no good solutions to this problem, the best we can do is to find the “least bad” solution. That can only be to raise the retirement age to at least 70 and probably higher in the future.
People will be working longer and contributing more, while retiring later, which reduces spending. This is the only answer that solves the problems in a manner that should be acceptable to most Americans, although admittedly not without some pain.
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